2018-06-03

Zimbabwe Says Yuan Strong. We Say Overvalued

The Chinese yuan and euro have tracked closely since the yuan's "surprise" depreciation in August 2015. It has outperformed the euro versus the U.S. dollar by 4 percentage points since then. USDCNY "should be" around 6.65 right now. China could have dumped euro assets and re-dollarized in the interim, it could have added more appreciating currencies, it could have invented a new formula that returns the desired exchange rate or it could be making up the numbers.

In 2016, due to the long-term lack of dollar reserves, the Central Bank of Zimbabwe imposed controls that stipulate that each account can only withdraw $50 per day, while the bank's own limit is more stringent — only $20 can be withdrawn.

In Zimbabwe, the renminbi became the local circulation currency starting from 2015. However, the U.S. dollar remains the most widely traded foreign currency in the country, but due to the reduction in supply, it poses a problem for local small and medium-sized manufacturing companies that need imported products.

Recently, the official website of the China-Africa Cooperation Forum quoted foreign media sources saying that because of the growing economic influence of China in Africa, the Central Bank of Zimbabwe recommended that southern and eastern African countries use the renminbi as their reserve currency.

I'm not sure the world is ready for taking advice from Zimbabwe's central bankers.

In Zimbabwe’s central bank governor’s view, the development of Africa should embrace the renminbi. As we all know, the renminbi has become a "universal foreign currency" in the trade between China and Africa.

In fact, the Zimbabwean central bank’s proposal is also the idea of ​​many African countries.

According to a report in the “Global Times”, the Eastern and Southern African Institute of Macroeconomics and Financial Management (MEFMI) stated in a statement that 17 senior officials of the government and central banks in the region were in the capital of Zimbabwe on May 29 and 30 in Harrah. On the forum held by Ray, the topic of “the feasibility of using RMB as the reserve currency in the region” was discussed.

MEFMI is a regional research institute consisting of 14 countries in Africa, including Angola, Botswana, Burundi, Kenya, Lesotho, Malawi, Mozambique, Namibia, Rwanda, Swaziland, Tanzania, Uganda, Zambia, and Zimbabwe. MEFMI spokesperson Gladys Severa-Jadadgu said that China is the largest trading partner of more than 130 countries and regions, and the main challenge for African countries is how to benefit from the new international trade model. Most countries in the MEFMI region have loans or donations from China, and it is economically significant to repay them in RMB. “The renminbi has become the so-called 'common currency' in trade with Africa.”

If the U.S. Dollar Index weakens and moves to a new low then the yuan will be a strong currency. If the dollar moves higher still, the yuan has a lot of catching up to do.